OVERRIDING INTEREST
Spring 2015
Highlighting developments and issues in the real estate industry
OVERRIDING INTEREST
CONTENTS
Dilapidations—How to Avoid Costly Mistakes
Page 3
MIPIM 2015
Page 6
Announcements & Events
Page 8
ransaction Profile: The Old Royal High
T
School, Edinburgh
Page 11
UK Real Estate Structures
Page 12
Legal Updates and Cases
Page 14
Dilapidations—How to Avoid Costly Mistakes
Introduction
Whether you are a landlord or a tenant
of commercial premises, it is vital to
think about the potential for terminal
dilapidations well before the expiry of
the lease. This may sound obvious but is
something which is often left rather late.
The law of dilapidations is complex and, in
terms of quantum, there are hurdles for the
unwary landlord and tenant which, if not
thought about and dealt with properly, can
prove to be costly.
Since the introduction of the Dilapidations
Pre-action Protocol there are even more
steps which landlords and tenants and their
surveyors need to comply with.
For landlords, well before the expiry of the
required to remedy the breaches and that
lease careful consideration should be given
the landlord’s intention for the property
The first, and one might think most
to the obligations of the tenant and how
is being taken into account and that any
obvious, consideration is to ensure there is
those may be impacted by plans for the
costings are reasonable.
a proper understanding of the contractual
building after expiry of the term.
The Lease
obligations imposed by the repairing
covenant in the lease. However those
obligations may not be easy to construe,
In good time the landlord’s building
particularly if there is wording which is
surveyor should prepare a schedule of
slightly out of the ordinary, or the obligation
dilapidations, in a form compliant with
is by reference to a schedule of condition.
the Pre-action Protocol, setting out what
All too often there is a mismatch of approach
or understanding of the lease obligations
between landlord and tenant or building
KEY CONTACTS
Steven Cox
+44.(0)20.7360.8213
steven.cox@klgates.com
surveyors and lawyers. This can be a recipe
for an expensive dispute. Even if agreement
2 K&L GATES: OVERRIDING INTEREST SPRING 2015
the landlord considers to be the breaches
of the repairing obligations in the lease,
the works required to be done to remedy
those beaches and, if relevant, the
landlord’s costings.
cannot be reached, it is important to
The schedule should be sent within a
understand the respective approaches as
reasonable time but that is generally
early in the process as possible.
within 56 days after the termination of
For the unwary tenant, relatively innocuous
Bonny Hedderly
+44.(0)20.7360.8192
bonny.hedderly@klgates.com
The Protocol
sounding repairing obligations can in fact be
much more onerous than they had realised.
the tenancy. The Pre-action Protocol
imposes a requirement that the schedule
be endorsed to confirm that the work
set out in the schedule is reasonably
There are obligations on the tenant in
relation to the timing and information to
be included in the response. There is
an obligation for the landlord and tenant
(usually by their respective surveyors) to
meet on a without prejudice basis with a
view to trying to agree as many items in
dispute as possible.
The protocol encourages alternative dispute
resolution as the courts take the view that
litigation should be a last resort.
Section 18(1)
The common law rule is that, if a tenant
leaves property in disrepair, he will be liable
for the cost of the repair and the loss of
rent for the time it would take to do the
repairs. However, common law damages
for dilapidations are subject to two statutory
3
OVERRIDING INTEREST
Dilapidations—How to Avoid Costly Mistakes
limitations set out in Section 18(1) of the
This can have a huge difference on the
For landlords with expectations of recovery
Landlord and Tenant Act 1927.
amount of damages for dilapidations
of substantial dilapidations from tenants
ultimately payable. The well advised
at expiry of their lease, great care must
landlord will consider his options early but
be taken not to commit to redevelop too
not necessarily commit to what works he
early since this can afford the tenant an
will undertake. The wise tenant will find out
opportunity to deny liability on the basis
as much as he can about the landlord’s
of supersession. Supercession generally is
intention with a view to making a sensible
an area which is fraught with difficulty and
offer which may give him costs protection
often leads to significant disputes.
The first limitation is well known—but
not always well understood—namely that
damages cannot exceed the diminution
in the value to the reversion caused by
the disrepair. Diminution in value of the
reversion is thought by some to equate to
the cost of repair works but it can be much
more complicated than that.
The second is that no damage shall be
recovered for a breach of any agreement to
leave premises in repair at the termination
of a lease, if it is shown that the premises,
in whatever state of repair they might be,
would at or shortly after the termination
of the tenancy have been pulled down, or
such structural alterations made therein as
would render valueless the repairs covered
by the covenant or agreement.
To benefit from this aspect of Section 18,
the tenant must demonstrate that the
landlord had formed an intention to carry
out superseding works by the termination
date of the lease and had intended to do so
“in whatever state of repair” the premises
might be.
Supersession
should a sensible commercial resolution of
the dispute not be achieved.
Careful use of Part 36 offers (without
prejudice save as to costs) can be a
valuable tactic to be deployed by landlords
or tenants even before proceedings
are issued. For a tenant it is a method
of potentially displacing the otherwise
inevitable costs obligation arising from a
dilapidations claim. It is surprising how
Conclusion
Both landlords and tenants involved
These disputes are not cheap—
hence the importance of
considering Part 36 offers early.
with leases due to expire and give rise to
potentially significant dilapidations liability
should seek advice early to maximise
recovery on the part of landlords and
minimise them where it is tenants who are
paying. This is a complex area of the law
and great care needs to be taken.
rarely this is used as it can place pressure
on a landlord who otherwise is confident
Jane Harte-Lovelace
that costs will end up being picked up by
+44 (0)20 7360 8172
the tenant.
jane.harte-lovelace@klgates.com
A hotly disputed dilapidations case will often
require the involvement of a surveyor with
Section 18 valuation experience in addition
to a building surveyor. These disputes
are not cheap—hence the importance of
considering Part 36 offers early.
Many tenants’ surveyors will return a
Although the vast majority of dilapidations
schedule of dilapidations denying liability
cases are agreed by negotiation between
for repairs on the basis of “supersession”,
the building surveyors, there are an
i.e. that the works which the landlord is
increasing number of disputes particularly
going to do render the repair works to
where the tenant argues that the landlord
remedy the breach unnecessary. This is not
is not going to carry out the works in
the get out of jail card which some tenants
schedule and has already decided
think and this is an area where great care
to redevelop and generally involving
needs to be taken both by landlords and
supersession arguments.
tenants in assessing and deciding what
works will be undertaken and when.
4 K&L GATES: OVERRIDING INTEREST SPRING 2015
5
OVERRIDING INTEREST
Global Real Estate Team MIPIM 2015
MIPIM 2015, Cannes, France
10th—13th March 2015
MIPIM is the leading networking event for property professionals;
its organisers describe it as a “market for international property
Members of the Real Estate, Planning and Finance teams will be attending MIPIM 2015 and
hope to meet you there.
trade”—25,000+ real estate professionals attend to view projects,
assess profitable ventures, strike deals, discover commercial real estate
opportunities and seek out market information. The European Real Estate,
London
Paul Alger
+44 7958 135 774
Paul.Alger@klgates.com
Sebastian Charles
+44 7958 117 929
Sebastian.Charles@klgates.com
Bonny Hedderly
+44 7932 820 575
Bonny.Hedderly@klgates.com
Amandeep Lafferty
+44 7958 135 363
Amandeep.Lafferty@klgates.com
Christian Major
+44 7958 135 153
Christian.Major@klgates.com
Barry McHugh
+44 7960 161 161
Barry.McHugh@klgates.com
Andrew Petersen
+44 7958 694 124
Andrew.Petersen@klgates.com
Planning and Finance teams are currently pre-planning for this year’s
conference and we are looking forward to meeting with professionals across
all international property sectors.
To arrange to meet with any member of the Team at MIPIM 2015,
please contact a team member directly or get in touch with Bonny Hedderly
(bonny.hedderly@klgates.com).
To learn more about our Real Estate Investment, Development, and Finance
Berlin
Georg Foerstner
+49 151 1215 9175
Georg.Foerstner@klgates.com
Felix Greuner
+49 151 1428 2655
Felix.Greuner@klgates.com
+49 170 922 2869
Rainer.Schmitt@klgates.com
+39 329 114 8936
Francesco.Sanna@klgates.com
Joanna Klat*
+971 529 218 125
Joanna.Klat@klgates.com
Edouard Vitry
+33 6 09 44 83 85
Edouard.Vitry@klgates.com
practice, please scan the QR code below.
Frankfurt
Rainer Schmitt
Milan
Francesco Sanna
Paris
* Joanna is also based in Dubai
Warsaw
Patryk Galicki+48 600 091 228Patryk.Galicki@klgates.com
Halina Wieckowska
6 K&L GATES: OVERRIDING INTEREST SPRING 2015
+48 516 149 759
Halina.Wieckowska@klgates.com
7
OVERRIDING INTEREST
Announcements and Events
New Joiners
Joanna Payne
Joanne McGilloway
AFIRE 2015 Winter Conference
For more information please contact
London
London
The Association of Foreign Investors in
Steven Cox (steven.cox@klgates.com).
Joanna is a senior associate
Joanne is an associate in
Real Estate (AFIRE) is a not-for-profit
the firm’s London office
association representing the interests of
in the firm’s London office
CREFC Spring Conference
On 16th–17th April 2015, the K&L Gates
and is a member of the Real Estate practice
and is a member of the Construction and
nearly 200 investing organisations from 21
group focusing on investment, development
Engineering practice. Joanne has acted for
different countries.
and management.
major developers and institutional investors
Partners from our U.S. offices will attend
2015. This conference will be attended by
on real estate development work advising
the conference this year. The Winter
more than 200 delegates over two days and
on construction–related matters. She has
Conference is an annual two-day meeting
provides a platform for commercial real
particular experience in non–contentious
held on 11th and 12th February in New
estate (CRE) finance participants to come
work which includes drafting and
York. The topics featured are specific to
together to learn about and discuss the
negotiating construction and engineering
the U.S., with a portion directly focused
latest trends and challenges facing
contracts. She also has experience advising
on New York City and the surrounding
the industry.
clients in the nuclear, education and
areas. Results of the AFIRE Annual Foreign
pharmaceutical sectors.
Investment Survey and a member survey
Her work includes the drafting and
negotiation of sale and purchase
agreements and associated documentation,
the drafting of certificates of title for sales
of properties and carrying out due diligence
and drafting reports on title and advising on
the risks involved on purchases.
Joanna has particular experience covering
investments (acquisitions and disposals),
management, development and corporate
real estate.
Martina Triacca
highlighting trends in international real
Recent and Upcoming Events
estate investment are also presented.
IPD EcoPAS – Q3 2014 Update
For more information about AFIRE or the
On 3rd December 2014, the London
office hosted the IPD EcoPAS Q3 2014
Milan
Update breakfast seminar. This seminar
Martina is an associate in
was chaired by Ian Cullen of MSCI and
the firm’s Milan office and
included a presentation by Peter Hobbs,
she works in the Administrative and Town
Head of Real Estate Research, MSCI
Planning law department.
on the latest results from IPD EcoPAS
Martina has developed significant
experience in the legal matters related
to administrative law, focusing on the
construction of private and public
works, town planning, environmental
and landscape issues, development of
energy projects, infrastructures, regulatory
compliance, commercial authorizations/
licences and public tenders, advising
measurement service. The presentation
was followed by a panel discussion by key
investment and valuation professionals
including Steven Cox of K&L Gates and
senior representatives from Barclays,
CBRE and Mayfair Capital. The panel
discussed the direction of IPD EcoPAS
and sustainability within the UK
property industry.
Winter Conference please contact Matt
of the CREFC Europe Spring Conference
The conference will be held at our offices in
One New Change.
For more information please contact
Andrew Petersen (andrew.petersen@
klgates.com).
Norton (matthew.norton@klgates.com)
or Mike Tomlinson (michael.tomlinson@
klgates.com).
Oxford Real Estate Conference 2015
On 18th March 2015, the K&L Gates
London office will be sponsoring the first
annual Oxford Real Estate conference
2015. The conference will assemble a
group of over 25 global real estate experts
to provide insight on “What will the real
estate universe look like in 2025?”.
Andrew Petersen will be presenting at the
conference. The conference is organised by
The Oxford Real Estate Society, an Oxford
Business Network, which is an organisation
Italian and foreign clients with activities
For more information please contact Bonny
made up of real estate professionals and
both in court and out of court.
Hedderly (bonny.hedderly@klgates.com) or
enthusiasts who share a common interest
Steven Cox (steven.cox@klgates.com).
in the industry.
8 K&L GATES: OVERRIDING INTEREST SPRING 2015
London office is pleased to be host sponsor
For information about our global
events program visit klgates.com.
9
OVERRIDING INTEREST
Transaction Profile: The Old Royal High School, Edinburgh
K&L Gates Advises on Redevelopment of Landmark Edinburgh Building
We are proud to be advising Urbanist
K&L Gates is advising Urbanist Hotels on the development of the old Royal High School building
Hotels on this complex transaction which
more than 40 years, having previously been earmarked as a site for the Scottish Parliament. The
will involve revitalising this architecturally
on Calton Hill in Edinburgh. A landmark on the Edinburgh skyline, the building has been vacant for
building is set to be developed into a luxury hotel by Duddingston House Properties and
Urbanist Hotels.
important neo-classical landmark building
Led by London partner Piers Coleman, the K&L Gates team is advising Urbanist on structuring and
in the centre of Edinburgh.
Borrie (Corporate Partner), Paul Beausang (Tax Partner) and Emma Tuppen (Tax Special Counsel).
tax issues and investment arrangements. Other K&L Gates London team members include Stuart
David Orr and Taco van Heusden at Urbanist Hotels commented: “We are excited by the opportunity
to develop this key Edinburgh building, delivering what we believe will become Scotland’s finest
hotel. The team at K&L Gates project managed the transaction for us, providing us with both
commercial and practical solutions.”
Piers Coleman stated: “We are proud to be advising Urbanist Hotels on this complex transaction
which will involve revitalising this architecturally important neo-classical landmark building in the
centre of Edinburgh.”
Piers Coleman
+44.(0)20.7360.8206
piers.coleman@klgates.com
10 K&L GATES: OVERRIDING INTEREST SPRING 2015
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OVERRIDING INTEREST
UK Real Estate Structures
Key Vehicles used to Hold UK
Real Estate
This article gives a brief overview of typical
vehicles that are used to hold UK real estate.
• limited liability companies, whether
located in the UK or elsewhere.
Where the vehicle is a “clean”
special purpose vehicle (“SPV”), it
will contain nothing except for the
property and the rent, leases and
other contracts, and any registrations
and liabilities associated with
that property. An SPV may be a
convenient way of parcelling up the
real estate in a discrete entity with
its own legal personality, and which
can enter into contracts, including
to finance the property, manage the
property and/or develop it. Recourse
can be contained and limited to the
assets of the SPV. The board of the
SPV can exercise control and make
professional appointments, such as
of an asset manager. By buying the
shares in the company rather than
the property itself, a buyer may make
significant savings by not having to
pay Stamp Duty Land Tax (“SDLT”).
• Jersey property unit trusts (“JPUTs”).
These are constituted by trustees
who are located in Jersey. Usually the
trust instrument follows a well settled
form as there are hundreds of JPUTs
in existence holding real estate all
across the UK. The income in the unit
trusts belongs to the beneficiaries
of the trust provided that the unit
trust is approximately drafted so as
to constitute a ‘Baker Trust’, and
normally this is recognised for the
purposes of UK tax on income. For
because the qualifying conditions
capital gains tax purposes, the JPUT
are stringent. REITs are not used for
is treated as a company located in
structuring particular transactions in
Jersey provided that it is correctly
the UK real estate market.
controlled and managed in Jersey.
The transfer of JPUT units is not
usually subject to SDLT.
• limited partnerships, registered
• PAIFs - property authorised investment
funds. These are designed for use
where there is widely held ownership.
PAIFs are open ended vehicles which
under the Limited Partnership Act
are tax transparent. They have stringent
1907. These protect the investing
conditions. The UK Government has
partners from liability provided they
been consulting during 2014 on the
do not get involved in the control
introduction of SDLT relief for the
and management of the partnership.
seeding of PAIFs, and for the transfer of
Accordingly, a general partner (usually
interests in PAIFs.
a company with limited liability) takes
full responsibility for the real estate
and any investment strategy and
makes all decisions (eg whether to
lease the property, who to and on what
terms). The general partner may be
advised by an investment manager.
Sometimes limited partnerships are
used in conjunction with JPUTs.
Partnerships can be more flexible
than corporate vehicles because, for
example, they do not have capital
maintenance rules or strict rules on
A key tax issue on a number of these
corporate-wrapped property entities is
whether or not they are involved in trading
in real estate in the United Kingdom or
whether there is investment activity.
The level of finance for these structures is
primarily a commercial matter and depends
on the appetite of the investors for gearing,
within prevailing market conditions. The
debt arrangements may be structured so
The level of finance for these
structures is primarily a commercial
matter and depends on the appetite
of the investors for gearing, within
prevailing market conditions.
that there is limited recourse to the ultimate
beneficial owner.
dividends. Partnership interests are
This article does not constitute legal advice
usually considered to be real estate for
on any particular situation. For a fuller
the purposes of SDLT and accordingly
version of UK Real Estate Structures,
the transfer of a partnership interest is
please contact one of the authors.
subject to SDLT as if the partnership
interests were land itself. Partnerships
Stuart Borrie
are tax transparent for most purposes,
+44.(0)20.7360.8155
although not for VAT, though some tax
stuart.borrie@klgates.com
filings are needed.
Paul Beausang
• REITs – Real Estate Investment Trusts.
Only a small number of very large UK
property investment companies have
reconstituted themselves as REITs
12 K&L GATES: OVERRIDING INTEREST SPRING 2015
+44.(0)20.7360.8100
paul.beausang@klgates.com
James Spencer
+44.(0)20.7360.8176
james.spencer@klgates.com
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OVERRIDING INTEREST
Legal Updates and Cases
Legal Updates
The New Electronic
Communications Code
Proposals have now been
Withdrawn from the
Infrastructure Bill by the
UK Government
Cases
Repeat Guarantees in
the Context of Excluded
Assignments
the sellers, repayment of the deposit and
roads, flood defences, and railways,
A “new” lease had been granted to T1
to rescind the contract and recover the
particularly in the North with the
and guaranteed by G. T1 then assigned
balance of the deposit. They were also
intention of building a “northern
the lease to T2 in breach of covenant.
entitled to recover the sums agreed under
We have previously reported on proposals
powerhouse” in Manchester to
All the parties wanted the lease re-
the side agreement.
for a new Electronic Communications
rival London.
vested in T1 and G again guaranteed the
Comment: The judgment contains a useful
tenant’s obligations under the lease but
summary of the case law on rescission of
were concerned that the anti-avoidance
a contract for the sale of land.
Code, which was intended to form part of
the new Infrastructure Bill. That Bill would
have introduced a reformed version of the
Electronic Communications Code (Code).
This would have been much welcomed by
the real estate industry. The Code gives
rights to providers of telecommunications
networks to install and maintain apparatus
in, over and under land. In February 2013,
the Law Commission published a report
with various recommendations as to how
the Code should be revised. It was widely
acknowledged that the Code was unclear,
out of date, and inaccessible. Further to an
announcement in January it now appears
that the Code will remain in its current
form, and no announcement has been
made as to any proposed future reforms.
The 2014 Autumn Statement
The Autumn Statement announced a
number of measures that are of interest to
the real estate industry:
• the replacement of old “slab” system
of stamp duty land tax (SDLT)
on residential properties and its
replacement with a number of bands
with effect from midnight 3 December
2014 but an increase in the tax rates.
• a “root and branches” review of the
business rates structure is promised.
• investment in infrastructure for
• reforms to the planning system.
• C ommitments to increase the
housing supply.
• Improvements to enterprise zones.
provisions of the Landlord and Tenant
(Covenants) Act 1995 might prevent a
simple re-vesting.
damages for misrepresentation.
The court held that the sellers were entitled
Hardy and another v Griffiths and another
[2014] EWHC 3947 (Ch)
DECs and EPCs
The High Court held that T1 could reassign to
The Department for Communities and
T2 supported by a fresh guarantee from G.
Limitation Periods
and Planning
Local Government will be publishing
Comment: An issue left unclear by
A landowner sought to rely on the limitation
approximately 723,000 records of data
Goodharvest and KS Victoria has
period in enforcement proceedings. The
from Display Energy Certificates and non-
been clarified.
court held that such reliance is subject
domestic Energy Performance Certificates
in response to a request made under the
Environmental Information Regulations
2004. It has given holders of non-domestic
EPCs the chance to opt out of having their
UK Leasing Brighton Ltd v Topland
Neptune Ltd and Zinc Cobham Ltd v Adda
Hotels (an unlimited company) [2015]
EWHC 53 (Ch)
to a public policy requirement of good
faith confirmed by Secretary of State for
Communities and Local Government and
another v Welwyn Hatfield Council [2011]
UKSC 15, which in this case the landowner
had not met.
The records will be published at address
Rescission of a Contract for
the Sale of Land and Damages
level. The use of the data will be subject to
The sellers of a property claimed that they
the Welwyn principle may apply to various
conditions and re-use of the addresses for
had been entitled to rescind a contract
circumstances and so the judgment will
commercial purposes prohibited.
for sale on the grounds that the buyers
be of general interest.
had failed to complete in accordance with
Jackson v Secretary of State for
a notice to complete. They also claimed
Communities and Local Government
The Department for Environment, Food
that they were entitled to recover the
[2015] EWHC 20 (Admin)
and Rural Affairs has announced that it
balance of the deposit under the terms
aims to establish Flood Re by July 2015.
of the contract and further damages for
The European Commission has approved
breach of a side agreement between the
the scheme under the EU state aid
parties. The buyers claimed that they were
rules. A draft scheme document is to be
entitled to rescind the contract as a result
published shortly.
of (non-fraudulent) misrepresentation by
information published.
Flood Risk
14 K&L GATES: OVERRIDING INTEREST SPRING 2015
Comment: The court discussed how which
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